What happened

Shares of Canaan (CAN 3.82%) surged as much as 21.3% higher on Thursday, following the release of impressive first-quarter results. By 3 p.m. ET, the stock had retreated to a still-impressive gain of 10.4%.

So what

The maker of microchips and systems specially intended for mining Bitcoin had guided first-quarter sales to approximately 1,550 million Chinese renminbi, 290% above the year-ago period's result. That didn't quite happen. Canaan's first-quarter revenue stopped at 1.356 million renminbi, which translates to roughly $214 million.

On the other hand, adjusted earnings landed at $0.41 per American depositary share (ADS), up from $0.01 per ADS in the first quarter of 2021. Furthermore, Canaan's revenue was limited by accounting practices as prepayments for crypto-mining machinery were recorded as prepayments and matching contract liabilities. These payments will move onto the income statement in future reports, as the prepaid chips and systems are delivered to customers. In the first quarter, the balance of prepaid contracts rose by 436 million renminbi, or $67.7 million.

A well-ventilated room filled with Bitcoin mining machines.

Image source: Getty Images.

Now what

These results show robust interest in Canaan's Bitcoin mining hardware, even though Bitcoin prices have fallen 39% lower in 2022.

The company is also dealing with lockdowns and quarantines in many Chinese cities as the country struggles to control another COVID-19 breakout. The lockdowns froze the delivery of fully manufactured mining systems during the first quarter. Many of these stalled deliveries have been completed after March 31, when books were closed for the first quarter, so most of the prepaid revenue should make its way onto the second quarter's revenue line.

In the long run, Canaan's business fortunes depend on continued demand for Bitcoin mining hardware, which in turn should rise and fall along with the cryptocurrency's prices. Also, Canaan started to set up its own Bitcoin mining operations in Kazakhstan in the fourth quarter, and that effort produced 114 Bitcoins in the first quarter. That's a clever move since Canaan can reallocate unsold mining machines to the Kazakh operation as market conditions change. And market conditions certainly change often in the volatile cryptocurrency sector.